Do you often ask yourself, “How long will my retirement savings last?” In this article, let’s look at a few statistics and help you plan out a comfortable retirement.
In this article:
- Life Expectancies and Retirement Anxieties
- Using Retirement Calculators
- Are Stocks Ideal for Retirees?
- The 4% Rule
- Other Ways to Stretch Your Retirement Savings
- Making Changes
How to Outlive Your Retirement Savings | Calculators and Tips
Life Expectancies and Retirement Anxieties
Life expectancies are no longer what they used to be. According to the Social Security Administration, today the average man who reaches 65 can expect to live until 84.3; the average woman who reaches 54 can look forward to living until 86.6. One in four 65-year-olds nowadays lives past 90, one in 10 lives beyond 95.
Who wouldn’t want to live longer? It’s what most of us hope for. But from a retirement-saving POV, it becomes a real challenge.
Did you know that 60% of baby boomers confessed in an Allianz study that they’re more afraid of outliving their retirement savings than dying? This thought was also evident in 43% of employees surveyed by Transamerica—outliving their life savings is their biggest retirement fear.
This sounds really grim. Secretly praying for your own demise before your savings run out is just depressing, and it’s no way to live.
A better solution is to crunch the numbers to see if your retirement savings can hold up for 30 years. It’s safe to assume 30 years given the life expectancy reports by authorities.
Using Retirement Calculators
Given the increasing life expectancies, the anxiety of outliving one’s savings can gnaw its way into your head. Thinking ahead and planning how much income you need to save to retire at a specific time helps.
There are online retirement savings calculators you can use:
- MaxiFi Basic Retirement Calculator
- AARP Retirement Income Calculator
- MarketWatch’s Retirement Calculator
- Schwab Retirement Savings Calculator
- T. Rowe Price Retirement Income Calculator
- New Retirement Online Tool
- Vanguard Retirement Income Calculator
- Fidelity Retirement Calculator
- Bankrate Retirement Calculator
Most of these financial calculators let you input your estimated monthly Social Security income, a pension if you have one, and your savings to give you the big picture so you can determine if you can cover your living costs for a set period of time.
When using these tools, you need a ballpark of what kind of yearly returns your savings are likely to get. If your retirement savings are mostly in CDs or savings accounts, with today’s rates you may not get much more than 1%.
On the other hand, if you have a bond-heavy portfolio, you may get around 3-4% average annual rate of return. However, if you are willing to stay investing in stocks, you may get a 6% average yearly return. You might score that much even with your portfolio evenly split between bonds and stocks.
Are Stocks Ideal for Retirees?
You may have been told no. The general rule of thumb with this kind of investment is that it’s fine to hold them if you won’t need your investments for at least 10 years.
If you are generally healthy and anticipating a long retirement, it may benefit you to keep a part of your portfolio in stocks. That’s because the chance of you not needing the money for quite some time is high.
The 4% Rule
While most of the retirement calculators above can estimate the longevity of your savings based on the anticipated returns plus your expected monthly income, you can also employ the 4% rule to check if your savings can last long enough.
This rule states that if you start withdrawing 4% of your retirement savings in the first year of retirement, then adjust following withdrawals to account for inflation, your retirement savings should last for 30 years.
It’s not perfect, but it’s a reasonable starting point for evaluating the strength of your retirement savings.
For example, you anticipate needing a monthly retirement income of $5,000, and Social Security gives you an additional $1,600 in benefits. Following the 4% rule, you have to withdraw $3,400 a month or $40,800 per year. $40,800 times 25 is $1.02 million. This should be your savings target.
Other Ways to Stretch Your Retirement Savings
1. Dynamic Withdrawal
The 4% rule is a little rigid—your yearly distributions are just inflation-adjusted, nothing else. Financial experts have created other ways to raise the chance of success, especially if you want your savings to last beyond 30 years.
With dynamic withdrawals, you adjust depending on the investment returns. Reduce withdrawals when returns aren’t as high as expected and get more when the numbers allow it.
There are many strategies you can employ here with varying complexity degrees. You may want to hire an advisor to know your options.
2. Income Floor Strategy
Here’s how the income floor strategy works:
Calculate how much you need to spend monthly for your essential living expenses (housing, food, medication) and ensure they’re covered by your guaranteed income, like annual Social Security benefits, bond ladder, or an annuity.
Some annuities can be overpriced and risky but a single premium immediate annuity is a great retirement income tool. You pay a lump sum for a guaranteed lifetime income.
By doing this, you have your basics and priorities covered. Your invested savings can cover your other expenses.
This tactic helps you safeguard your savings for the long run by ensuring you don’t have to sell stocks when the market is down.
If you’re close to retiring or newly retired with not many savings, you have to make changes to prevent your nest egg from depleting too soon.
You may have to live a more frugal retirement life to decrease your monthly spending. You may also consider working part-time as a senior to add to your income.
When it comes to it, there are plenty of options you can consider to make your retirement savings last longer. You just have to be flexible and realistic as you learn the ropes of living out your golden years comfortably stress-free. Don’t hesitate to contact a financial expert who can give you sound advice and strategies to make the most out of your retirement savings.
What is your retirement savings plan? Let us know in the comment section below.
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